A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

Question

Quizplus · Accepted Answer

To calculate the operating cash flow using the tax shield approach, we need to use the following formula:

OCF = (Sales - Cash expenses - Depreciation) x (1 - Tax rate) + Depreciation

OCF = ($60,000 - $51,000 - ($40,000/4)) x (1 - 0.35) + ($40,000/4)

OCF = $9,000 x 0.65 + $10,000

OCF = $9,350

Therefore, the operating cash flow of the project using the tax shield approach is $9,350. The best choice is C.

A Project Will Increase Sales by $60,000 and Cash Expenses